Financial literacy is low not only in financially backward countries, but also in developed countries, and this may have serious repercussions. Tito Boeri and Luigi Guiso (http://www.voxeu.org/index.php?q=node/488) argue that financial illiteracy, in the form of ‘financial inexperience and myopia of consumers/investors’, is a main cause of the subprime crisis. Consumers fell for the prospect of getting a mortgage at rates never seen before and then extrapolating these rates out for thirty years. This myopia was encouraged and exploited by banks and other lenders eager to attract and retain clients. Thus began the process that led to today’s financial crisis.
With the help of the suggested readings, consider the following questions:
How did the financial illiteracy lead to the subprime crisis? To what extent can financial literacy prevent such a situation from reoccurring?
(You can just answer either one of the questions. Remember to limit your comments to 2-3 paragraphs; it’s really not worth writing a long essay! Each blog comment gets a maximum of 5 points; each correctly answered MCQ — which you will do on 27 June — gets 1 point. Please refer to the briefing slides that we emailed you for more information on the way we mark. Thanks!)
– Boeri , Tito and Lugi Guiso. ‘Subprime Crisis: Greenspan’s Legacy.’ Vox: Research-based Policy Analysis and Commentary from Leading Economists. 23 Aug 2007. <http://www.voxeu.org/index.php?q=node/488>.
– ‘The Downturn in Facts and Figures.’ BBC News. 21 Nov 2007. <http://news.bbc.co.uk/1/hi/business/7073131.stm>.
– ‘Sub-prime Mortgage Crisis’. Wikipedia: The Free Encyclopedia. 8 June 2009. <http://en.wikipedia.org/w/index.php?title=Subprime_mortgage_crisis&oldid=295086853>.
– ‘Financial Crisis of 2007-2009’. Wikipedia: The Free Encyclopedia. 8 June 2009. <http://en.wikipedia.org/w/index.php?title=Financial_crisis_of_2007%E2%80%932009&oldid=295132875>.